Mar152013

California foreclosure starts surge 41% in February

The big national banks entered into a settlement agreement with attorneys general across the country early last year. Under the terms of the settlement, banks were allowed to count losses from short sales toward meeting their payment goals, but foreclosure losses did not count. Therefore, the banks radically changed their policies and started approving short sales and stopped pursuing foreclosures. As a result, short sale activity increased, which cleared many languishing deals from the MLS, and the banks stopped processing REO which further reduced the MLS inventory. Whether by design or by accident, the dramatic decrease in MLS inventory caused the housing market to bottom early last year.

This created one big problem for the banks: squatters. People who complete a short sale or a loan modification must cooperate with the bank. Unfortunately, there are many borrowers who aren’t cooperating. Many quit making their payments many months or years ago, and they are hiding out in their houses enjoying a free ride. Since the banks are not going to give away free houses, they have to do something with these people. Banks let them squat because they already had so many foreclosures that prices were crashing, so banks weren’t in a position to boot them all out at once. And with the banks need to meet the requirement of the settlement agreement, they tried to cajole as many of them as possible to enter into loan modifications or sell short. Last year I predicted that more foreclosures were inevitable because its the only way lenders can clean out the trash.

According to the latest report from the Office of Mortgage Settlement Oversight, lenders are exceeding their goals for homeowner relief writing off losses. Iowa Attorney General Tom Miller wrote a recent post where he touts the success of the settlement program. Thee post is mostly self-serving political bullshit, but it does underscore that lenders have written off a lot of debt, and the banks have nearly fulfilled their settlement requirements. As one would expect, once the banks complete their requirements, they will turn to the squatters and start foreclosure processing in earnest.

Headwind to Housing Recovery? Foreclosures Flare-Up Again

Published: Thursday, 14 Mar 2013 | 10:07 AM ET

Banks are repossessing fewer homes, in fact the fewest since March of 2007, but in some states that may be about to change, according to a new report from RealtyTrac, an online foreclosure data and sale firm.

Bank repossessions, the final stage of the foreclosure process are down 29 percent from a year ago, but foreclosure starts, which are the first stage of the process, jumped 10 percent in February from the previous month. This after falling for three consecutive months.

“At a high level the U.S. foreclosure inferno has been effectively contained and should be reduced to a slow burn in the next two years,” said Daren Blomquist, vice president at RealtyTrac.

Daren is probably right. Lenders are not going to flood the market with REOs. Over the last six years, they’ve learned how to properly manage their dispositions for maximum recovery. Some markets will still go down, particularly the judicial foreclosure state markets on the East Coast.

“But dangerous foreclosure flare-ups are still popping up in states where foreclosures have been delayed by a lengthy court process or by new legislation making it more difficult to foreclose outside of the court system. Foreclosure starts have been steadily building in those states over the last several months and likely will end up as bank repossessions or short sales later this year.”

(Read More: Home Buyers Are Back, but Where Are the Houses?)

In hard hit Nevada, where a new state law criminalizing faulty foreclosures went into effect last year, foreclosures basically ground to a halt. In February, however, they hit a 17-month high, up 334 percent from a year ago, according to RealtyTrac, which means banks will inevitably repossess thousands more properties in the near future.

Nevada foreclosures decreased by 85% when the law was changed in late 2011. The recent increase is off a very low base number, but the increase is substantial. In all likelihood, the foreclosures will be readily consumed by the large private equity hedge funds who now operate in the area.

This as home builders in Las Vegas are ramping up construction, due to historically low supplies of homes for sale. That supply is about to change.

(Read More: Here’s What Is Fueling the Housing Boom in Vegas)

The jump in new foreclosures is not just in the formerly hardest hit states either. Foreclosure starts jumped 319 percent in Maryland from a year ago, 172 percent in Washington, 139 percent in New York, and 70 percent in New Jersey. All of these states have large backlogs of delinquent mortgages due to new state laws governing foreclosures and/or the fact that they require a judge in the process.

The strongest correlation we see is that states with the biggest jumps in foreclosure starts are states with some of the most pro-active foreclosure prevention legislation over the past few years. We believe that resulted in a short-term drop in foreclosure activity but is now resulting in a backlash of delayed foreclosures,” says Blomquist.

Daren is right on with his analysis. The housing bubble wasn’t allowed to deflate on the East Coast because the foreclosures were kept off the market. Now with sky-high delinquency rates due to strategic default, lenders have even more foreclosures to process. I think the whole amend-extend-pretend policy will prove to be a failure. The losses were delayed but not avoided.

In California, foreclosures slowed dramatically last year due to a new law designed to protect homeowners, the California Homeowner Bill of Rights, and due to the $25 billion National Mortgage Settlement with mortgage servicers over so-called “robo-signing” foreclosure paperwork fraud. In February, new foreclosure starts jumped 41 percent, the first gain since July of 2012.

Yikes!

While the percentage jump is large, in a twist, some argue the foreclosure delays still persist and are hurting the recovery.

I argue that delaying foreclosures hurts the recovery. Until we clear the overhang of cloud inventory, at some point, appreciation will stall out and prices will languish for a very long time while the inventory is finally cleared.

(Read More: No Money? No Worries. Home Lenders Ease Rules)

“While policy makers state that the purpose of government intervention is to help homeowners by delaying foreclosures, instead they have created an artificial shortage in bank-owned inventory (REO). The combination of the decline in REO inventory and lack of motivated sellers has left the California real estate market with an acute lack of inventory, which is putting upward pressure on prices,” say analysts at ForeclosureRadar.

Sean O’Toole has consistently been correct with his analysis of the housing market. Unfortunately, rapidly rising prices is what the banks want. They are thinking about the short term and won’t worry about long-term problems with slow sales or low affordability until they have to.

While price gains help recovery, if they happen too fast, they price would-be buyers and investors out of the market, which slows sales again. Price recovery has many believing that housing is suddenly not just back on its feet again, but surging ahead—much of the price recovery is based on lack of inventory of homes for sale, which in turn is due to foreclosure delays, which as we now see, can turn very quickly.

The surge in foreclosure listings in February comes after six consecutive months of declines, and notices are still well below last year’s pace. This one-month change may be an anomaly, but it may be a turning point where lenders finally focus on booting out the long-term squatters. If so, it’s a policy change that’s long overdue.